Centre is nudging Kerala towards a financial crisis, says State in Supreme Court

Kerala has filed a suit in the Supreme Court accusing the Centre of violating the federal structure of governance and causing “severe damage to the economy of a small State with meagre resources” by interfering with its finances. The suit said a State, in a federal system of governance, had the exclusive power to regulate its finance through preparation and management of its budget and borrowings. The amendments had violated “fiscal federalism” by creating unconstitutional limits and impediments on the State to borrow and regulate its own finances.

Kerala has filed a suit in the Supreme Court accusing the Centre of violating the federal structure of governance and causing “severe damage to the economy of a small State with meagre resources” by interfering with its finances.

The suit said a State, in a federal system of governance, had the exclusive power to regulate its finance through preparation and management of its budget and borrowings.

The State, represented by advocate C.K. Sasi, contended that recent actions, amendments and executive orders by the Centre were calculated to reduce Kerala to a state of penury.

Kerala said the Centre had imposed a Net Borrowing Ceiling (NBC) on the State in a way to limit its borrowings from all sources, including the open market. The Centre had deducted borrowings by State-owned enterprises where the principal and/or interest was serviced out of the budget or where such borrowings were made to finance schemes announced by the State. The Centre had also imposed conditions on the State taking loans from outside India.

The State said amendments made to the Fiscal Responsibility and Budget Management Act, 2003 had amounted to a blatant encroachment into the “legislative domain of the State as ‘Public debt of the State’ was an item exclusively in the State List in the Seventh Schedule under Article 246 of the Constitution”.

The amendments had violated “fiscal federalism” by creating unconstitutional limits and impediments on the State to borrow and regulate its own finances.

The actions of the Centre had interfered with the exclusive constitutional power of Kerala to even “define” its annual budget and seek approval of the Legislature for allocation of funds. It had handicapped the plenary power of Kerala to manage its public debt, public account and the Consolidated Fund of the State; create and run State-owned enterprises; legislate on its borrowings; and borrow on the security of its Consolidated Fund.